More evidence that we are at a critical moment for fossil fuels broadly, not just the standard roller coaster downturn.
U.S. energy companies are taking their foot off the natural-gas pedal, slowing down their production growth after years of furious pumping.
In the past eight years, a combination of improvements in drilling techniques and high energy prices stoked natural-gas production to all-time highs. The boom quickly sent natural-gas prices to historic lows, but output kept rising because high oil prices made it profitable for producers to keep tapping fields that yielded both oil and gas.
Now, the global collapse in oil prices has producers and analysts rethinking the gas boom, too. Both gas and oil prices are down about 40% in the past year, cutting the incentive to keep drilling. A flurry of recent forecasts from government and private-sector experts suggest monthly gas production will flatten and possibly even begin to decline in 2015.
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Natural-gas producers have defied predictions of slowing output growth before, and they would probably get back to work quickly if either gas or oil prices embarked on a sustained rally.
But some analysts say the current downshift in natural-gas production is more widespread than in previous slumps.
“The big fat difference is that [drilling] activity is down in every corner, from every entity that you can think of,” said Jan Stuart, global energy economist at Credit Suisse.
Mr. Stuart’s estimates indicate that U.S. gas output hit an all-time peak in December and will decline throughout 2015. Department of Energy data released at the end of May showed natural-gas output growth in the first quarter at its slowest since the fourth quarter of 2013.
“If you believe that U.S. oil production is peaking, then you would see a similar knock-on impact to gas,” said Greg Sharenow, a portfolio manager at Pacific Investment Management Co., one of the firms to bet on rising prices later this year. “It’s the same companies and the same economics being challenged from both sides.” Pimco has about $20 billion invested in commodities.
Gas production is being impacted by the downturn in Shale oil drilling – which has been in effect, subsidizing low gas prices with gas production coincident to the shale drilling process. The WSJ article points out, “Higher prices for oil and other liquid fuels including ethane and propane effectively subsidized gas drilling, Credit Suisse told investors in a presentation last month.”
GoFrac’s end mirrored its beginning: steeper and faster than expected and driven by the unpredictable forces of international oil markets. U.S. oil prices dropped 60 percent from June to January due to oversupply from U.S. shale deposits, putting an end to the oil drilling boom and precipitating the sharpest industry downturn in a generation.
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The small- and medium-sized firms that make up at least half of the nearly $100 billion a year U.S. oil services industry that provides fracking sand and specialized chemicals for fracking have been hit far harder than their large, cash-rich rivals by the downturn, experts say.
While giants like Halliburton, Baker Hughes and Schlumberger are weathering the slump by cutting tens of thousands of jobs, firms like GoFrac are going under or heading that way, starved of cash and unable to raise emergency investment.
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Even as oil prices rebound, and analysts expect production to grow again in 2016, the demise of the service sector raises questions about the U.S. oil industry’s ability to speed up again if prices rise further.
“It could slow down the ramp up,” said James West, who researches the oil service sector for Evercore ISI in New York and said there could be dozens of bankruptcies in the U.S. oil service sector.